BANKING LAW (OPTIONAL II) PROJECT ON

E-COMMERCE AND THE INDIAN

BANKING SECTOR

Submitted To:
DR. KIRAN KORI
(Faculty of Banking Law)

Submitted By:
Vardhikaa Sharma
Semester- IX, Roll No. 184

Batch- XIV

DATE OF SUBMISSION: OCTOBER 25TH, 2018

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR, C.G.

 ACKNOWLEDGEMENTS
I am highly elated to carry out my research on the topic, E-commerce and the Indian Banking
Sector. I would like to give my deepest regard to our course teacher Dr. Kiran Kori, who
helped me with her advice, direction and valuable guidance, which enabled me to march
ahead with this topic.

I would like to thank my friends, who gave me their precious time for Discussion and helped
me a lot in completing my project by giving their helpful suggestion and assistance. I would
like thanks to my seniors for their valuable support. I would also like to thank the library
staff and computer lab staff of our university for their valuable support and kind cooperation.

Vardhikaa Sharma

SEMESTER IX,

ROLL NO. 184

Page | 2
 CONTENTS
ACKNOWLEDGEMENTS............................................................................................................................................ 2

INTRODUCTION .......................................................................................................................................................... 4

RESEARCH OBJECTIVE ........................................................................................................................................ 5

RESEARCH METHODOLOGY .............................................................................................................................. 5
RESEARCH QUESTIONS ....................................................................................................................................... 5
CHAPTERISATION ............................................................ ERROR! BOOKMARK NOT DEFINED.
MODE OF CITATION ............................................................................................................................................ 5
SCOPE AND LIMITATION .................................................................................................................................... 5
E-C OMMERCE APPLICATION IN BANKING INDUSTRY .................................................................................. 6

PRODUCTS OFFERED ........................................................................................................................................... 6

ADVANTAGES OF E-COMMERCE IN BANKING ................................................................................................. 9

BENEFITS TO THE BANKS................................................................................................................................... 9

BENEFITS TO THE CUSTOMERS ........................................................................................................................ 9
TO THE MERCHANTS, TRADERS, ETC ......................................................................................................... 10
CHALLENGES OF E- BANKING .......................................................................................................................... 11

TECHNOLOGY AND SECURITY ISSUE ........................................................................................................... 11

LEGAL ISSUES ..................................................................................................................................................... 11
REGULATORY AND SUPERVISORY ISSUES.................................................................................................. 12
BANKS’ CHANGING RESPONSE TO E-COMMERCE ...................................................................................... 12

DEVELOPMENT OF E-COMMERCE PRODUCTS .......................................................................................... 13

RISK IMPLICATIONS............................................................................................................................................... 15

STRATEGIC RISK ................................................................................................................................................ 15

OPERATIONAL RISK .......................................................................................................................................... 18
RISK MANAGEMENT ............................................................................................................................................. 19

CONCLUSION ........................................................................................................................................................... 20

RECOMMENDATIONS............................................................................................................................................. 20

BIBLIOGRAPHY ....................................................................................................................................................... 21

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 INTRODUCTION
Electronic commerce is sharing business information, maintaining business relationships and
conducting business transactions by means of telecommunications network. Tremendous
progress in the field of information technology has reduced the world to a global village and
it has caused unprecedented change in the banking industry. Online Banking is becoming an
important aspect of worldwide commerce. Online banking provides banks a new and more
efficient electronic delivery tool.1 Online banking includes various banking activities
conducted from home business, instead of at a physical bank location. Online banking
focuses on the E-commerce from the perspective of customers and banks in India. Online
banking is defined as automated delivery of new and traditional banking products and
services through electronic and interactive communication. In Online banking you can
transfer money between accounts, review past statements and credit card transactions. Online
banking calculates the interest to be paid on loans and credit cards within fraction of second
at any time at any place.2

Banks today operate in a highly globalized, liberalized, privatized and a competitive

Environment. In order to survive in this environment banks have to use IT. IT has introduced
new business paradigm. It is increasingly playing a significant role in improving the services
in the banking industry. Indian banking industry has witnessed tremendous developments due
to sweeping changes that are taking place in the information technology. Internet banking
changed both the banking industry as well as banks’ services to its customers. ‘Anywhere
banking’ came to be recognized as an opportunity also for differentiated and competitive
services. Apart from branch banking in the brick and mortar mode, click and order channels
like internet banking, ATMs, tele-banking and mobile banking are now in vogue. Customers
can view the accounts, get account statements, transfer funds, purchase drafts by just making
a few key punches. Availability of ATMs and plastic cards to a large extent make it necessary
for customers going to branch premises. Smart Cards with an embedded micro-processor chip
have brought about revolutionary change. Electronic Data interchange (EDI) is another
development that has made its impact felt in the banking arena. Transaction costs have fallen

1
D. Vyas S, “E-banking and E- commerce in India and USA”, 2009.
2
Kaur M, "E-Commerce Kalyani Publication", Delhi (2012).

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down, productivity has tremendously improved, new banking products and services have
entered the market.3

RESEARCH OBJECTIVE

1. To study and analyze the progress made by Indian banking industry in adoption of
technology.
2. To understand the benefits of e-commerce in banking sector.
3. To study the issues and challenges faced by the Indian Banking Sector in undertaking
e-commerce activities.

RESEARCH METHODOLOGY

The research undertaken is non doctrinal and analytical in nature. Significant reference has
been made to secondary and electronic sources of data.

RESEARCH QUESTIONS

1. How is e-commerce prevalent in the Indian Banking Sector?

2. What are the issues and challenges faced by use of e-commerce in the banking sector?

MODE OF CITATION

A uniform system of Standard Indian Legal Citation has been adopted throughout the project.

SCOPE AND LIMITATION

This project analyses the role of e-commerce, primarily in terms of e-banking.

3
Navpreet Kaur, Dr. Ashutosh Pathak, Parminder Kaur, O NLINE BANKING ON E-COMMERCE IN INDIA, Int.
Journal of Engineering Research and Applications, ISSN : 2248-9622, Vol. 5, Issue 4, ( Part -6) April 2015,
pp.39-49.

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 E-COMMERCE APPLICATION IN BANKING
INDUSTRY
New information technologies and emerging business forces have triggered a new wave of
financial innovation – electronic banking (e-banking). The banking and financial industry is
transforming itself in unpredictable ways (Crane and Bodie 1996), powered in an important
way by advances in information technology (Holland and Westwood 2001). Since the 1980s,
commercial banking has continuously innovated through technology-enhanced products and
services, such as multi-function ATM, tele-banking, electronic transfers and electronic cash
cards. Over the past decade, the Internet has clearly played a critical role in providing online
services and giving rise to a completely new channel. In the internet age, the extension of
commercial banking to the cyberspace is an inevitable development (Liao and Cheung 2003).

E-banking creates unprecedented opportunities for the banks in the ways they organize
financial product development, delivery and marketing via the internet. While it offers new
opportunities to banks, it also poses many challenges such as the innovation of IT
applications, the blurring of market boundaries, the breaching of industrial barriers, the
entrance of new competitors and the emergence of new business models (Saatcioglu et al.
2001, Liao and Cheung 2003). Now the speed and scale of the challenge are rapidly
increasing with the pervasiveness of the internet and the extension of information economy
(Holland and Westwood 2001).

PRODUCTS OFFERED

All of the major banks in India have an internet presence offering a range of products directly
to consumers by way of proprietary internet sites. While the initial focus of the banks has
been in the retail-banking sector, there is a growing range of small to medium enterprise
("SME") and corporate banking products and services being offered. The products available
include

(A) FUNDS TRANSFER AND PAYMENT SYSTEMS

The major banks offer a range of online financial services including:
(i) Payment of bills;
(ii) Transfer of funds;

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 (iii) Remittances;
(iv) Applications for letters of credit; and
(v) Settlement through the MAS Electronic Payment System.

(B) B2B E-COMMERCE

At least one of the major commercial banks offers an integrated B2B e-commerce product
directly through its website, involving product selection, purchase order, invoice generation,
and payment. However, integrated B2B products and services are not as yet generally
available directly from the banks.

(C) SECURITIES PLACEMENT AND UNDERWRITING/CAPITAL MARKETS ACTIVITIES

Most commercial banks offer securities services such as online payment for shares and
subscriptions for initial public offerings directly though their websites. However, more
sophisticated online brokering services are generally only available through the banks' share-
broker subsidiaries.

(D) SECURITIES TRADING

A full range of online securities services are provided by the specialist securities subsidiaries
of the major commercial banks including online trading.

(E) RETAIL BANKING

All of the major commercial banks have established websites for retail services. Typically
such sites will offer the following services:
(i) a full range of personal account services, including foreign currency accounts;
(ii) funds transfers;
(iii) Bill payments;
(iv) Credit card services;
(v) Investment services; and
(vi) Online application for loan services including:
(a) Car loans;
(b) Renovation loans;
(c) Home loans; and
(d) Personal credit lines.

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E-Commerce has provided the platform that enables the implementation of core banking
solutions (CBS). Today all the major banks have gone on to implement CBS. And with time
being a premium among bank customers, banks have been ideating and developing newer
modes of delivering banking services. Today there is a whole plethora of such platforms
available ranging from the ATM to the mobile.

Banks like State Bank of India and its associates are recording over 100,000 transactions on a
daily basis through their 5,000 plus network of ATMs. Incidentally the profile and usage
pattern of ATMs in India matches that of ATMs abroad with an overwhelming (more than
80%) being used for cash withdrawal. Today with over 20,000 ATMs, India is recording one
of the fastest growth in terms of ATM proliferation, though the per capita availability of
ATMs doesn't compare anywhere to markets like Japan or the US.

With most banks now providing Internet banking facility, bankers say that customers are
using the bank for a variety of purposes; one commonly used service being booking of rail
tickets. Bankers also say that customers are using bank networks for online shopping. Most of
the online banking channels are linked to major retailers. Estimates also indicate that today
over 40% of the share transactions are being put through the internet.4

4
C. Gopalakrishnan and R. Muthukrishnan, E-COMMERCE AND ITS APPLICATION IN INDIAN INDUSTRIES,
available at: http://www.indianmba.com/Faculty_Column/FC889/fc889.html, last accessed on 4th October
2018at 9:19 pm.

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 ADVANTAGES OF E-COMMERCE IN BANKING
Banks have an important reason to pursue the conduct of business on-line. If they fail to
respond to the opportunities posed by the Internet, they could be consigned to a largely
secondary role as commerce shifts toward electronics over time.

BENEFITS TO THE BANKS

E-banking services help in increasing profits.

E-banking provides competitive advantage with boundary less network to the banks.
Due to e-banking banks carry on business less with paper money and more with plastic
money; have online transfer of funds, thus economizing on the cost of storage of huge
stocks of currency notes and coins.
By connecting with ATM and PO terminals, risk of cash overdraw can be eliminated in
case of ATM credit and debit cards.
E-banking websites can act as a revenue earner through its promotional activities.
Customers can avail e-banking facility from anywhere, therefore saving the need not to
invest more on building infrastructures.
Websites that offer financial convergence for the customer will create a more involved
banking customer who will more frequently utilize the banking websites.

BENEFITS TO THE CUSTOMERS

Reduced costs in accessing and using the banking services.

Increased comfort and timesaving - transactions can be made 24 hours a day, without
requiring the physical interaction with the bank.
Quick and continuous access to information- Corporations will have easier access to
information as, they can check on multiple accounts at the click of a button.
Better cash management- E-banking facilities speed up cash cycle and increases efficiency
of business processes as large variety of cash management instruments are available on
Internet sites of Estonian banks.
Reduced costs- This is in terms of the cost of availing and using the various banking
products and services.

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 Convenience- All the banking transactions can be performed from the comfort of the home
or office or from the place a customer wants to.
Speed - The response of the medium is very fast; therefore customers can actually wait till
the last minute before concluding a fund transfer.
 Funds management- Customers can download their history of different accounts and do a
“what-if” analysis on their own PC before affecting any transaction on the web. This will
lead to better funds management.

TO THE MERCHANTS, TRADERS, ETC.

It ensures assured quick payment and settlement to the various transactions made by the
traders.
It provides a variety of services to the businessmen on par with the international standards
with low transaction cost.
Cost and risk problems involved in handling cash which are very high in business
transactions are avoided.
It leads to the growth of global and local clientele base with the development of e-
Banking.
Other benefits include improved image, improved customer service eliminating paper
work, reduced waiting costs and enhanced flexibility.
Broadly, all users emphasized 3 major attributes they considered important for their online
banking experience: Simplicity, Security, Service.

SIMPLICITY: Users and non-users expect online banking to be further simplified than what
they see today. Some expectations:
o Better link label clarity suggestive of action required
o Better navigation that highlights and presents relevant information in context and at
the right time needed
o Better content partitioning according to popularity and priority of action

SECURITY: Non-transactors and non-users reported that they did not transact online
because:
o concerns about the security of their banking information is not fully addressed
o technical glitches and unreliability create confusion and anxiety • additional security
gateways were absent.

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SERVICE: Almost all transactors demanded better service. They wanted:
o More services to be available online
o Better and faster customer support channels like online chat to solve banking Hurdles
o Innovative and intuitive interface.

CHALLENGES OF E- BANKING
The concept of e- banking cannot work unless and until have a centralized body of of
institution, which can formulate guidelines, regulate, and monitor effectively the functioning
of internet banking. The most important requirement for smooth working of internet banking
is the use of best security methods. This presupposes the existence of best technological
devices and methods to protect electronic banking transactions. The Reserve Bank Of India
constituted a working group on Internet banking which focused on three major areas of E-
banking:

TECHNOLOGY AND SECURITY ISSUE

This issue is of prime importance as internet banking rests upon it. The RBI realizing the
importance of the issue has issue the following guidelines:

Banks should have a security policy duly approved.

Banks should introduce logical access controls to data, systems, application software,
utilities, telecommunications lines, system software etc. logical access controls techniques
may include user-ids, passwords, smart cards, or other bio-metric technologies.
All applications of banks should have proper record all computer accesses including
messages received should be logged.

LEGAL ISSUES

This is an obligation by banks not only to verify the identity but also to make enquiries
about integrity and reputation of the prospective customers.
The Consumer Protection Act, 1986 defines the rights of consumers in India and is
applicable to banking services as well.
 In internet banking scenario there is very little scope for the banks to act on stop payment
instructions from the customers. Hence banks should clearly notify to the customers the
timeframe and the circumstances in which any stop – payment instructions could be
accepted.

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REGULATORY AND SUPERVISORY ISSUES:

The banks operating in real space are regulated and supervised by the RBI on regular basis
and is extended to internet banking as well.
Only such banks which are licensed and supervised in India and have physical presence in
India will be permitted to offer internet banking products to residents of India. Thus, both
banks and virtual banks incorporated outside the country and having no physical presence
in India will not be permitted for internet banking.
The products should be restricted to account holders only and should not be offered in
other jurisdictions.

BANKS’ CHANGING RESPONSE TO E-

COMMERCE
A review of the banking industry’s response to on-line commerce suggests that even as
recently as five years ago, banks’ involvement with the Internet was quite limited. A bank
might set up a web site to provide consumers with information about its services. Actual
banking transactions, however, still took place at the branch, through the mail, by telephone,
or over the automated teller machine (ATM) network.

In the last few years, however, many banks have begun to use the Internet as a supplementary
channel for delivering traditional products to consumers and businesses. Some banks are also
investigating how they might expand their current service offerings to include some products
designed exclusively for e-commerce.5 In the remainder of this section, we describe both
types of initiatives and the benefits they may bring to banks and their customers. Electronic
Delivery of Traditional Banking Products Many banks have established transactional web
sites where individuals and businesses can perform many basic banking functions such as
checking balances, transferring funds, or applying for credit cards. Small businesses can
apply for loans, initiate wire transfers, and take advantage of cash management and payroll
services.6 When limited to such services, these web sites function as another access channel
for basic banking services—one that is not all that different from the branch networks or

5
John Wenninger , THE EMERGING ROLE OF BANKS IN E-COMMERCE , available at:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5342&rep=rep1&type=pdf, last accessed on 4th
October 2018, at 3:30 pm.
6
Ibid.

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telephone centres maintained by banks except that customers use personal computers and the
Internet to communicate with their banks. The transactional web sites offer banks and their
customers notable advantages. Customers are attracted by the convenience of this access
channel, while banks welcome the cost savings that arise when customers perform the
transactions themselves rather than dealing with a bank representative at a teller window or
over the phone. A recent estimate suggests that between 6 million and 7 million consumers
are banking on-line, with high rates of new users interested in this service (Microbanker
1999).

DEVELOPMENT OF E-COMMERCE PRODUCTS

Banks are designing and deploying a range of new e-commerce products. If the products
described below prove successful, the basic business mix of banking is likely to change.
Banks may increasingly function as facilitators of on-line commerce and see a decline in their
long-standing role as financial intermediaries.

ESTABLISHING INTERNET PORTALS: A number of banks are planning to participate in

special Internet portals, “supersites” where many sellers will display their product offerings
and large numbers of buyers will visit.7 Some of these portals will feature a broad range of
financial and nonfinancial product offerings; others will limit their offerings to financial
services.

VERIFYING IDENTITIES: Banks are also planning to offer a product that would protect e-
commerce participants against fraud arising from the misrepresentation of identities.8
Using encryption technology, each bank would certify the identities of its own account
holders and serve as the intermediary through which its account holders could verify the
identities of account holders at other banks. In this way, both sides of an e-commerce
transaction would have some assurance that they were not dealing with an impostor.

ASSISTING SMALL-BUSINESS ENTRIES INTO E-COMMERCE: Another effort being undertaken

by some banks involves helping smaller firms set up the infrastructure— interactive web site
and payment capabilities—for engaging in e-commerce. In addition, a few banks are offering

7
John Wenninger , THE EMERGING ROLE OF BANKS IN E-COMMERCE , available at:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5342&rep=rep1&type=pdf, last accessed on 4th
October 2018, at 3:30 pm.
8
See Buckley (1998) and the Internet Council of the National Automated Clearing House Association (1999).

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small businesses electronic procurement services, including the negotiation of volume
discounts from vendors (Wilder 1999; Dalton 1999).

ELECTRONIC BILLING: Electronic bill presentment and collection services are being
developed as an enhancement to the existing cash management and remittance processing
services offered by banks to large companies that send out substantial volumes of recurring
bills. In this effort, banks will combine the e-mail capability of the Internet to send out bills
with their own ability to process payments electronically through the interbank payment
networks. First, the biller sends its bank an electronic file containing its monthly bills. The
bank then distributes the bills electronically to web sites selected by the biller and consumers.
Consumers review the bills on a web site and initiate payment by clicking on a special icon.
Finally, the bank collects the funds electronically and updates the biller’s accounts receivable.
The entire billing and payment cycle is conducted electronically, without resort to paper
documents of any kind.

FACILITATING BUSINESS-TO-BUSINESS E-COMMERCE: A few of the largest commercial

banks have begun to offer firms the technology for electronic business-to-business
commerce. These banks are essentially undertaking to automate the entire information flow
associated with the procurement and distribution of goods and services among businesses.8
From the banks’ perspective, this service is a natural extension of the automated cash
management services they already provide to large corporations.

ISSUING ELECTRONIC MONEY AND ELECTRONIC CHECKS: Two e-commerce products still
in the planning stage are electronic money and electronic checks. As more computers become
equipped with “smart card” readers, banks are considering issuing electronic money that
could be stored on these cards and spent over the Internet. In addition, a banking technology
organization is working with the U.S. Treasury and some banks to test an electronic version
of a paper check. The check could be sent over the Internet from a buyer to a seller,
electronically endorsed by the seller, and then forwarded on-line to the seller’s bank for
electronic collection from the buyer’s bank.9

INTEGRATING THE ATM AND INTERNET NETWORKS: Some technology companies and a
banking technology group are exploring the feasibility of allowing access to the Internet and

9
John Wenninger , THE EMERGING ROLE OF BANKS IN E-COMMERCE , available at:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5342&rep=rep1&type=pdf, last accessed on 4th
October 2018, at 3:30 pm.

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to bank web sites from ATMs. If the integration of these two networks can be accomplished,
consumers should be able to use ATMs to engage in e-commerce or to conduct their banking
in the flexible environment of their bank’s web site.10

In offering e-commerce products, banks have some key advantages over potential
competitors. The public is likely to value the “brand names” of banks and to see these
institutions as trustworthy third parties enjoying established account relationships with
consumers and businesses. Moreover, if banks are sought out as vendors of e-commerce
products, they may see some gains in their other lines of business. E-commerce would create
opportunities for banks to strengthen their relationships with customers, sell additional
services, and prevent encroachment on their business activities by the technology companies
and other nonbank financial service providers active in e-commerce.

RISK IMPLICATIONS
Although banks stand to gain from e-commerce involvement, they will also face some
significant new risks. Some of these risks are strategic—that is, banks may be unable to adapt
successfully to the changes in the business environment created by e-commerce. Others are
operational—meaning that the computers and network technology that support e-commerce
could malfunction.11

STRATEGIC RISK

E-commerce will surely transform the competitive landscape in banking and finance. One
danger for banks is that they will be caught off guard by the changes, unable to anticipate
new forms of competition or to respond to them in an appropriate way. We term this
possibility strategic competitive risk.

Consider, for example, the challenge posed by the emergence of banks that operate
exclusively on the Internet. Such banks will come to the electronic marketplace
unencumbered by the need to support a costly branch network.11 As a consequence, these
Internet only banks can offer attractive deposit and loan rates and perhaps waive many of the
fees routinely charged by banks with large branch networks.12 Similarly, on-line financial
service providers such as mutual funds or discount brokers may expand their product

10
Ibid.
11
See Fickenscher (1999).
12
Internet-only banks have some disadvantages as well. They can accept check deposits only by mail, and their
customers may have to pay a fee to obtain currency from another bank’s ATM.

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offerings to include some traditional banking products. Operating free of branch networks,
these providers may also offer very competitive rates on credit cards and transactions
accounts.

Because the potential for Internet-only banking is still unknown, banks run the risk of under-
or overreacting to these new sources of competition. A few large banks have chosen to create
banking subsidiaries that operate primarily on the Internet and compete directly with the
other on-line providers of financial services.13 But these banks may find themselves spending
large amounts of money on an approach to banking that never becomes truly popular with
consumers. Conversely, banks that are too slow to compete may find that they lose customers
to their on-line rivals.

Banks will also have to respond to new competitive pressures created by nonbank firms that
function as information aggregators in the electronic marketplace. These firms offer a search
service, pricing similar products across a large number of competing institutions and making
their findings available on-line. Hence, consumers seeking the most favourable rates on credit
cards, deposits, and mortgages can obtain this information quickly over the Internet.
Electronic comparison-shopping will reduce the geographic barriers to finding the best terms
on banking products, depriving banks of market power in local regions.

In reaction to this development, banks have sought to retain customers by adopting a strategy
of bundling products to fit individual preferences. While the information aggregators
effectively transform banking products into commodities, making price the paramount
consideration; banks are cultivating relationships with their customers and tailoring their
services to meet their customers’ needs. By persuading customers to purchase a range of
financial products, banks bind their customers to them and create an opportunity to offer new
services (such as financial planning) at different stages in their customers’ life cycles.

However, this bundling approach has an important drawback: the need to gather and monitor
data on customers’ preferences raises privacy concerns. Potential customers may be reluctant
to divulge information that banks could pass on to other business firms.

Another area of exposure for banks might be called strategic adjustment risk—the possibility
that banks will misjudge the degree to which electronic banking will supersede more
traditional forms of banking. At this time, it is not clear whether on-line banking will

13
See Brooks (1999) and Senior (1999b).

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supplement the existing “brick and mortar” branch networks or substantially replace them.
Certainly, there is considerable disagreement within the industry about the course that
banking will take. Some argue that banks serve their customers best by giving them easy
access to all the available banking channels—the “click and mortar” approach. Others
contend that maintaining duplicate access channels is too costly and that branch networks
should be sharply reduced as electronic channels gain acceptance.

Ultimately, customer preferences and competition will determine which approach will
dominate. But whatever the final outcome, banks will have to make many interim decisions
as they adjust to the growth of the electronic marketplace. They may choose to scale back the
number of their branches, to locate smaller and more efficient branches in large retail outlets
such as supermarkets, or to find additional uses for existing branches. They will also have to
decide whether it is better to expand geographically through mergers—a strategy that
generates increased numbers of both branches and customers—or to expand their customer
base by providing nationwide Internet access to banking products and e-commerce
capabilities.14 Large banks enjoying national brand name recognition and a national customer
pool in credit cards or another product might pursue the Internet strategy because a partial
relationship already exists with many potential full service customers.

Much is at stake in the choices that banks make. If banks adjust the size and scope of their
branch networks too quickly or dramatically, they run the risk of alienating those segments of
their customer base that are not ready to rely fully on electronic banking.

Adjustment risks will also arise as banks adapt to changes affecting interbank networks. The
development of electronic money, electronic checks, and electronic bill presentment, along
with the increased ability to initiate electronic payments over automated clearinghouse and
Fedwire systems from personal computers, could significantly reduce the use of cash, paper
checks, and even credit cards. The consequent shift in the relative volumes of payment
instruments may prompt banks to reconsider their support of the existing paper check
clearing network and the ATM and credit card networks. Although in the past, new payment
instruments and technology have often been added without making existing ones obsolete,
the strategic question banks face is whether the outcome could differ this time around. If one
or more of these networks do become redundant, banks will have to decide how extensively

14
See de Senerpont Domis (1999) for a discussion of the branching strategy of some banks.

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they will invest in networks and technology that may not be viable long enough to permit a
full recovery of their investment.

OPERATIONAL RISK

Banks’ entry into the electronic marketplace brings with it increased exposure to
technological failure. The success of banks’ efforts to market products over the Internet will
depend on the continued smooth functioning of their computers and the underlying computer
network. If individual computers fail, causing customers inconvenience, the reputations of
individual banks may be damaged; if the network fails, a large amount of business may be
lost. Banks could also suffer financial losses if hackers entered fraudulent transactions that
compromised bank systems, forcing the institutions to shut their systems down.

One strategy often thought to minimize banks’ operational risk is the outsourcing of e-
commerce systems to third-party vendors. This strategy frees banks from much of the
responsibility for system maintenance and system breakdowns and presumably leads to cost
savings through economies of scale.15 However, banks that outsource their systems give up a
certain amount of control over security and other critical aspects of system management. In
addition, if a large number of banks outsource their e-commerce systems to the same vendor,
an operational problem at this vendor could have a pervasive effect on the ability of banks to
engage in e-commerce.

15
See Senior (1999c).

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 RISK MANAGEMENT
To manage strategic and operational risks effectively, banks will develop information
systems to monitor the financial exposure resulting from their involvement in e-commerce.
On the wholesale side, banks have made advances in setting up risk management systems that
model how much value is at risk under alternative assumptions about interest rates, the
relative values of financial instruments, and other market conditions. With e-commerce,
placing a dollar value on the exposure associated with strategic and operational risks is more
difficult—particularly if legal as well as regulatory action is required to resolve any problems
that might arise. In addition, e-commerce is still a relatively new phenomenon without a long
history of results from which to formulate expectations about risk.

Banks do have considerable experience, however, in managing certain aspects of operational

risk. For example, if banks draw on their experience with wholesale payments systems, they
will establish back-up computer systems for their on-line activities. These systems will be
located at remote contingency sites that do not rely on the same infrastructure support as the
primary site. Furthermore, in monitoring e-commerce systems and transactions for evidence
of tampering or fraudulent activities, banks might look to the technology they use in checking
credit card transactions for unusual patterns that could indicate a lost or stolen card.

The way in which banks manage the risks associated with e-commerce will clearly be of
interest to bank supervisors. The U. S. Comptroller of the Currency (1999) has published a
handbook on Internet banking for national bank examiners, and the Federal Deposit
Insurance Corporation (1999) has issued a letter addressing system security issues. Both
documents cite the growing importance of Internet banking as a reason for increased
supervisory interest, and both review the risk issues, especially the information security issue,
in much more detail than can be presented here.16

16
John Wenninger, THE EMERGING ROLE OF BANKS IN E-COMMERCE, available at:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5342&rep=rep1&type=pdf, last accessed on 4th
October 2018, at 3:30 pm.

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 CONCLUSION
How are banks responding to the opportunities created by the rise of on-line commerce?
Many banks have already put in place a cost-efficient electronic access channel for traditional
banking products. In addition, a number of banks are planning to offer new products designed
specifically for e-commerce. If these initiatives are widely adopted within the industry, the
composition of banks’ business activities will change. Indeed, banks may increasingly act as
e-commerce facilitators while their long-standing business lines decline in importance. Such
a change would probably prompt banks to scale back the size or alter the scope of their
branch networks and to devote more resources to the development and maintenance of
computer networks and software. The precise role that banks ultimately play in e-commerce,
however, will depend in large part on how well they manage the strategic and operational
risks associated with doing business in the electronic marketplace.

RECOMMENDATIONS
E-banks should create awareness among people about e-banking products and services.
Customers should be made literate about the use of e-banking products and services.
Special arrangements should be made by banks to ensure full security of customer funds.
Technical defaults should be avoided by employing well trained and expert technicians in
field of computers, so that loss of data can be avoided.
Employees of banks should be given special technical training for the use of e-banking so
that they can further encourage customers to use the same.
Seminars and workshops should be organised on the healthy usage of e-banking especially
for those who are ATM or computer illiterate.
E-banking services should be customised on basis of age, gender, occupation etc so that
needs and requirements of people are met accordingly.
Government should make huge investments for building the infrastructure.17

17
Ms. Khushboo Taliwal, ROLE OF E- COMMERCE IN INDIAN BANKING SECTOR, CASIRJ Volume 5 Issue 7
[Year - 2014], ISSN 2319 – 9202.

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 BIBLIOGRAPHY
C. Gopalakrishnan and R. Muthukrishnan, E-COMMERCE AND ITS APPLICATION IN INDIAN
INDUSTRIES, available at: http://www.indianmba.com/Faculty_Column/FC889/fc889.html.

 D. Vyas S, “E-banking and E- commerce in India and USA”, 2009.

John Wenninger, THE EMERGING ROLE OF BANKS IN E-COMMERCE , available at:

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5342&rep=rep1&type=pdf.

Kaur M, "E-Commerce Kalyani Publication", Delhi (2012).

 Ms. Khushboo Taliwal, ROLE OF E- COMMERCE IN INDIAN BANKING SECTOR, CASIRJ

Volume 5 Issue 7 [Year - 2014], ISSN 2319 – 9202.

Navpreet Kaur, Dr. Ashutosh Pathak, Parminder Kaur, ONLINE BANKING ON E-COMMERCE
IN INDIA, Int. Journal of Engineering Research and Applications, ISSN : 2248-9622, Vol.
5, Issue 4, ( Part -6) April 2015, pp.39-49.

http://shodhganga.inflibnet.ac.in/bitstream/10603/74801/9/chapter%203.pdf.

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